Health Insurance Basics for Small Business / Insurance / Last Modified: February 22, 2017

As small businesses struggle over health insurance, a National Association of Insurance Commissioners (NAIC) survey finds that two out...

As small businesses struggle over health insurance, a National Association of Insurance Commissioners (NAIC) survey finds that two out of three business owners feel clueless about health insurance choices and costs.  

Here are your basic options, from full-featured major medical plans, to HMOs, PPOs, health savings accounts (HSAs) and more - plus what you can expect to pay right now for a small group plan, and some of the best ways to control the costs of providing health coverage at your business:

Indemnity plans - These major medical plans typically have a deductible - the amount you pay before the insurance company begins paying benefits. After covered expenses exceed the deductible, benefits usually are paid as a percentage of actual expenses, often 80 percent. These plans offer the most flexibility in choosing where to receive care.

Health Maintenance Organization (HMO) - HMOs make you choose a primary care physician (PCP) from a list of network providers. Your PCP is responsible for managing all of your health care. If you need care from any network provider other than your PCP, you may need a referral. Insured employees must receive care from a network provider in order to have the claim paid through the HMO. Treatment received outside the network may be covered at a reduced level or not at all.

Preferred Provider Organization (PPO) - Under these medical plans, the insurance company enters into contracts with selected hospitals and doctors to furnish services at a discount. As a member of a PPO, you may be able to seek care from a doctor or hospital that is not a preferred provider, but you will probably pay a higher deductible or co-payment.

Point of Service (POS) plans- These are a hybrid of the PPO and HMO models. They are more flexible than HMOs, but still require you to select a PCP. Like a PPO, you can go to an out-of-network provider and pay more of the cost. However, if the PCP refers you to an out-of-network doctor, the health plan will pay the cost.

Health Savings Accounts (HSA) and High Deductible Health Plans-- A Health Savings Account is not health insurance by itself. Rather, it is a savings plan that offers an alternate way to pay for health care.  HSAs let you pay for current health expenses and save for future medical and retiree health expenses on a tax-free basis.

In order to open an HSA, an individual must be covered by a High Deductible Health Plan (HDHP). Sometimes referred to as a "catastrophic" health insurance plan, an HDHP is low-cost coverage that only kicks in after the first several thousand dollars or more of expenses. 

Controlling Costs

The average premium for small group health insurance is around $350 per month ($4,200 per year) per employee, and $880 per month ($10,55 annually) for family coverage.

Before selecting a health plan, survey your employees to find out what kind of coverage is important to them. Small business plans are not standardized, and benefits vary greatly. In some states, group health insurance must cover childhood immunizations, mammograms, pap smears, prostate screening and diabetic supplies. In other states, these may not be mandated.

The rates an insurer can charge a small business are typically set in a range by state law for employers offering plans with the same benefits design and which have similar "case characteristics" such as employee age and gender and business location.

Some cost factors are outside of your control while others can be managed. For example, HMOs are typically less expensive than PPOs; both are less expensive than indemnity plans.

As a rule of thumb: the higher the deductible, the lower the premium. Typical deductibles range from $50 to $250, though "catastrophic" policies come with much higher deductibles in the $1,000 to $5,000 range.

Maximum out-of-pocket limit is also a factor. Many plans have a cap - a maximum limit on the amount of out-of-pocket expense that an employee is expected to pay for health care in each calendar year.

The NAIC has a super helpful website called Insurance University that offers detailed information on a variety of small business insurance topics.

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